Practice Problems (Module 3)

A) The legal market quantity and price do not change, the market operates at equilibrium
B) There will be an increase in quantity sold in the market
C) Consumers will be unable to receive the desired quantity of goods in the market
D) Producers will be stopped from receiving their goods at the equilibrium price

First, let's consider: what is a price ceiling?

A price ceiling is a legally established maximum price for a good or service. They're typically imposed when the market price is “too high”.

In terms of binding vs nonbinding, the distinction comes down to how the price ceiling compares to when the market is at equilibrium.

In order for a price ceiling to be binding, it must be below the equilibrium price. When it's below the equilibrium price, then the price ceiling "binds" the market to operate at a lower price (set by the ceiling).

If a price ceiling is not binding, that means that it's above the equilibrium price, and therefore doesn't interfere with the equilibrium price.

This question is dealing with a non-binding price ceiling...

Question #1: If a non-binding price ceiling is put in place, what is the typical consequence on the market?

...and since it's non-binding, that means it won't impact the market price, and therefore won't impact market quantity!

This corresponds with answer choice A!

A) The legal market quantity and price do not change, the market operates at equilibrium
B) There will be an increase in quantity sold in the market
C) Consumers will be unable to receive the desired quantity of goods in the market
D) Producers will be stopped from receiving their goods at the equilibrium price

A) $4 and 30
B) $3.50 and 25
C) $3 and 28
D) $5 and 40

When you are given both a supply and demand equation...

Use the following information for Questions 2 - 4:

• Qs = 10 + 6P
• Qd = 34 - 2P

...the first step to finding equilibrium price and quantity is to set them equal to one another and solve for P!

Your equation should look like this:

10 + 6P = 34 - 2P

Notice we have Qs here...

10 + 6P = 34 - 2P

...and Qd here.

10 + 6P = 34 - 2P

Now, let's solve for P...

10 + 6P = 34 - 2P
8P = 24
P = 3

...resulting in an equilibrium price of $3!

This corresponds with answer choice C...

A) $4 and 30
B) $3.50 and 25
C) $3 and 28
D) $5 and 40

...and just to be sure the quantities match up, go ahead and plug P = $3 into either the Qs or Qd equation (it doesn't matter which, they'll both equal the same value!)

Qs = 10 + 6($3) = 10 + 18 = 28
Qd = 34 - 2($3) = 34 - 6 = 28

This matches up with the quantity in C as well, meaning we can rest assured with C as our final answer!

A) $4 and 30
B) $3.50 and 25
C) $3 and 28
D) $5 and 40

A) Shortage of 6 units
B) Surplus of 8 units
C) Surplus of 5 units
D) Shortage of 8 units

First, let's check if the price ceiling is above equilibrium price. If it is, that means that our price ceiling is non-binding and therefore won't impact the market quantity.

The equilibrium price (as solved for in Question #2) was $3...

10 + 6P = 34 - 2P
8P = 24
P = 3

...and the price ceiling imposed is $2...

Question #3: The Isle of Crammer Nation has decided to impose a price ceiling of $2. Is there now a shortage or surplus of goods and by how much? 

...which means the price ceiling is less than equilibrium price. Therefore, this price ceiling is binding, and will result in a shortage.

How so?

Well, at the equilibrium price of $3, the market quantity (where demand = supply) was 28 units...

Qs = 10 + 6($3) = 10 + 18 = 28
Qd = 34 - 2($3) = 34 - 6 = 28

...but now that the price ceiling is set to $2...

Qs = 10 + 6($2)
Qd = 34 - 2($2)

...the quantity supplied is 8 units less than the quantity demanded!

Qs = 10 + 6($2) = 10 + 12 = 22
Qd = 34 - 2($2) = 34 - 4 = 30

The market is demanding more units than are being supplied! This represents a shortage (and therefore eliminates choices B and C, which deal with a surplus)!

A) Shortage of 6 units
B) Surplus of 8 units
C) Surplus of 5 units
D) Shortage of 8 units

How many units is this shortage? Well, the quantity demanded (Qd) is 30 units, whereas the quantity supplied (Qs) is 22 units...

Qd - Qs = 30 - 22 = 8 units

...indicating an 8 unit shortage!

This aligns with answer choice D!

A) Shortage of 6 units
B) Surplus of 8 units
C) Surplus of 5 units
D) Shortage of 8 units